Fitch Ratings-Dubai/London-04 March 2015: Fitch Ratings has affirmed the Long- and Short-term Issuer Default Ratings (IDR) of six UAE banks as part of its peer review of the UAE banking sector. A complete list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS: IDRs, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The affirmation of the banks' Long-term IDRs, Support Ratings and Support Rating Floors, except for HSBC Bank Middle East Limited (HBME), reflects the extremely high probability of support available from the UAE authorities, and governments of Abu Dhabi (AA/Stable/F1+) and Dubai, if required.
Fitch's view of support considers the sovereign's strong capacity to support the banking system, sustained by its sovereign wealth funds and on-going revenues mostly from its hydrocarbon production, despite the lower oil prices, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch's opinion of support is also based on the willingness of the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties and ownership links with the government in a number of banks.
Five of the banks - National Bank of Abu Dhabi (NBAD), First Gulf Bank (FGB), Abu Dhabi Commercial Bank (ADCB), Union National Bank (UNB) and Emirates NBD (ENBD) - have Support Ratings of '1', reflecting the extremely high probability of state support.
Fitch assesses whether the banks are domestic systemically important financial institutions (D-SIFI) based on each bank's systemic importance relative to other banks in the banking system, and considering, among other things, market share and franchise.
The 'AA-' Support Rating Floor of NBAD reflects its flagship status in the UAE and Abu Dhabi in particular, at one notch above Abu Dhabi banks' domestic systemically important financial institution (D-SIFI) Support Rating Floor of 'A+'. The other three Abu Dhabi banks - FGB, UNB and ADCB - are at the D-SIFI Support Rating Floor of 'A+', reflecting their high systemic importance. Abu Dhabi banks' D-SIFI Support Rating Floor is also one notch higher than the other UAE banks, due to Abu Dhabi's superior financial flexibility.
ENBD's Support Rating Floor of 'A+' is one notch above the UAE D-SIFI Support Rating Floor of 'A', reflecting its flagship status in the UAE, and Dubai in particular.
HBME's Support Rating is also '1', and reflects very strong potential institutional support from its parent, HSBC Holdings plc (HSBC, AA-/Stable), based on Fitch's view that HBME is a core subsidiary of HSBC Holdings. HBME is HSBC Holdings plc's wholly owned vehicle for its Middle East and North African operations; ownership and common branding in Fitch's opinion provide strong motivation to support in case of need.
FGB, HBME and EIB Sukuk Company Ltd's trust certificate issuance programmes, ADCB Islamic Finance Company, and the senior unsecured notes issued under this are rated in line with their respective banks' IDRs and are therefore subject to the same rating drivers.
RATING SENSITIVITIES: IDRs, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The banks' Support Ratings and Support Rating Floors are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector, or a change in Fitch's view of support in the UAE. Given the robust economy, the authorities' strong track record of support for local banks and no plans for resolution legislation at this stage, downward pressure is considered low.
HBME's Long-term IDR is based on the support it is expected to receive from HSBC Holdings plc. Fitch views HBME as a core subsidiary and consequently the rating is aligned with that of the parent. Any changes in the IDR would be linked to that of HSBC Holdings plc or to Fitch's view on its propensity to support its subsidiary. Coordination by regulators remains a prerequisite for maintaining aligned group ratings. However, this could change depending on how authorities' resolution frameworks will be applied to HSBC group and its local entities. There may be cases for greater rating differentiation between entities in the group, e.g. if Fitch concludes that material resources are trapped or if support is discouraged.
Where the banks' IDRs are driven by support, these would also be sensitive to a change in their IDR of the support provider.
The FGB, HBME and EIB Sukuk Company Ltd trust certificate issuance programmes, ADCB Islamic Finance Company, and the senior unsecured notes are subject to the same sensitivities.
KEY RATING DRIVERS AND SENSITIVITIES: VRs
Abu Dhabi, and by extension the UAE, is one of the largest economies in the GCC, with solid growth prospects supported by significant government spending on infrastructure projects and an expanding non-oil private sector, particularly in Dubai. The banks all benefit from an improving operating environment, sound liquidity, sound capital ratios and pre-impairment operating profit levels, which are able to absorb higher credit costs, if necessary.
Some asset quality issues remain in Dubai, largely relating to the weak performance of the real estate sector during the crisis and some large Dubai government-related entity (GRE) problem loans, although both areas have substantially improved. High loan and deposit concentration is a constraint on the VRs, but where exposure is directly to the Abu Dhabi government Fitch considers it as less unfavourable.
Asset quality deterioration and rapid loan expansion, and subsequent reduction in capital ratios, would be the most likely drivers of negative action on the banks' VRs. Reduced concentration in loans and deposits could be beneficial for the VRs, although the relative reliance on the government sector and a naturally concentrated borrower base means that upside potential will be limited for most banks.
KEY RATING DRIVERS AND SENSITIVITIES: NBAD's VR
NBAD's VR reflects the bank's strong franchise, especially in Abu Dhabi; the strength of its management and its close links to the Abu Dhabi government, which benefit both its lending and its funding profile; its consistently sound profitability; and its fairly sound asset quality. The main constraint on the rating is NBAD's significant concentration, both in loans and deposits to related party entities, in addition to inherent risks in the UAE operating environment. To date, international expansion has been well managed and focussed primarily on good quality large corporates with natural economic ties to the UAE. Significant expansion outside of those parameters that lead to a material increase in the risk profile could result in negative rating action.
Downward pressure on NBAD's VR could also arise from a significant deterioration in asset quality or a material increase in concentration levels, especially if it weakens the bank's otherwise healthy profitability and capitalisation. Given the high level of the VR, an upgrade is unlikely but could result from successful gradual expansion and reduced concentration on both sides of the balance sheet.
KEY RATING DRIVERS AND SENSITIVITIES: FGB's VR
FGB's VR reflects some concentrations in loans and deposits, balanced by better asset quality than peers, its strong capitalisation, adequate liquidity, sound and consistent profitability and the strength of its local franchise.
FGB's VR would be adversely affected by a deterioration in the domestic operating environment or a significant deterioration in asset quality, particularly as a result of rapid loan growth, or if there is a sharp reduction in capital or liquidity levels, which Fitch does not expect at present. Although upside is limited, it could be positively affected by further diversification of the loan portfolio and the depositor base.
KEY RATING DRIVERS AND SENSITIVITIES: UNB's VR
UNB's VR reflects improving asset quality but still high concentrations in the loan book, including exposures to various Dubai government-related entities that have been restructured. However, it also factors declining but still satisfactory liquidity and adequate capital.
UNB's VR would be mainly sensitive to deterioration in asset quality eroding the bank's otherwise healthy profitability and capitalisation. Upside potential is limited at present, but in the long term may benefit from an improvement in the UAE operating environment, resolution of the Dubai GRE restructuring and signs of a lasting recovery in the domestic real estate market. Reduced concentration levels on both sides of the balance sheet may also benefit the VR.
KEY RATING DRIVERS AND SENSITIVITIES: ADCB's VR
ADCB's VR reflects the bank's solid commercial franchise and improving financial metrics over the past three years; specifically, operating profitability, funding, liquidity and capitalisation, assisted by an experienced management team. Fitch recognises that asset quality metrics have improved, high borrower and sector concentrations are reducing, and that management have implemented a more conservative risk appetite. However, a longer track record of improvement is needed before the bank could be upgraded to investment grade.
ADCB's VR could be adversely affected by any significant deterioration in asset quality, such as restructured loans becoming non-performing, or a sharp reduction in capital or liquidity levels, which Fitch does not expect at present. It could also be positively affected by further diversification in lending, including ADCB fully addressing its high single-name exposures.
KEY RATING DRIVERS AND SENSITIVITIES: HBME's VR
HBME's VR reflects its weaker asset quality than peers and high borrower concentration, which exposes it to event risk and potentially higher levels of losses. However, it also captures HBME's current repositioning of the book towards higher quality lending. The VR is underpinned by the bank's solid regional franchise, diversified and sound earnings capabilities, strong liquidity position, and the management, reputational and operational benefits of being part of the HSBC group.
HBME's VR would be sensitive to a deterioration in asset quality affecting the bank's capitalisation and profitability. An upgrade of HBME's VR may result from a demonstrated recovery in renegotiated loans and continued improvement of asset quality.
KEY RATING DRIVERS AND SENSITIVITIES: ENBD's VR
ENBD's VR reflects high impaired loans, high loan concentration and high levels of restructured loans. It also reflects the bank's strong UAE franchise, with one of the largest market shares. It has highly diversified revenue streams and a high revenue-generating capacity, improving reserve coverage, adequate capitalisation, sound liquidity and an extensive customer deposit base. Overall, Fitch believes that ENBD has sufficient operating revenue to absorb further impairment charges, without adversely affecting the bank's capital base, if needed.
Any significant deterioration in ENBD's asset quality or reserve coverage, or any further increase in loan concentration, especially to related parties, could lead to a downgrade of the VR. Similarly, a downgrade could occur if any significant increase in loan impairment charges erodes the bank's operating profit or capital base. If the bank succeeds in working out the remaining problems in its loan book, and reducing its large concentration to the Dubai government, an upgrade of the VR would be possible.
The rating actions are as follows:
National Bank of Abu Dhabi:
Long-term IDR affirmed at 'AA-'; Stable Outlook
Short-term IDR affirmed at 'F1+'
Viability Rating affirmed at 'a-'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AA-'
EMTN programme affirmed at 'AA-'/'F1+'
Senior unsecured debt affirmed at 'AA-'
First Gulf Bank:
Long-term IDR affirmed at 'A+'; Stable Outlook
Short-term IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
EMTN programme affirmed at 'A+'/'F1'
Senior unsecured notes affirmed at 'A+'
Senior unsecured programme affirmed at 'A+' and 'F1'
FGB Sukuk Company Limited:
Trust certificate issuance programme affirmed at 'A+'
Senior unsecured certificates affirmed at 'A+'
Union National Bank:
Long-term IDR affirmed at 'A+'; Stable Outlook
Short-term IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
EMTN programme affirmed at 'A+'/'F1'
Senior unsecured debt affirmed at 'A+'
Abu Dhabi Commercial Bank:
Long-term IDR affirmed at 'A+', Stable Outlook
Short-term IDR affirmed at 'F1'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
GMTN programme affirmed at 'A+'
Senior unsecured notes affirmed at 'A+'
ECP Programme affirmed at 'F1'
ADCB Finance (Cayman) Limited:
Senior unsecured notes affirmed at 'A+'
Subordinated notes affirmed at 'A'
ADCB Islamic Finance (Cayman) Limited:
Senior unsecured trust certificates affirmed at 'A+'
HBME:
Long-term IDR affirmed at 'AA-', Stable Outlook
Short-term IDR affirmed at 'F1+'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
EMTN programme and senior unsecured notes affirmed at 'AA-'/'F1+'
HBME Sukuk Company Limited:
Trust certificate issuance programme affirmed at 'AA-'
ENBD:
Long-term IDR affirmed at 'A+'; Stable Outlook
Short-term IDR affirmed at 'F1'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
ECP programme affirmed at 'F1'
Senior unsecured notes affirmed at 'A+' and 'F1'
Subordinated notes affirmed at 'A'
Senior unsecured programme affirmed at 'A+' and 'F1'
EIB Sukuk Company Limited:
Trust certificate issuance programme affirmed at 'A+'
Senior unsecured certificates affirmed at 'A+'
Contact:
Primary Analyst
Redmond Ramsdale
Director
+971 4 424 1202
Al Thuraya Tower 1, Office 1805 & 1806, Dubai Media City,
Dubai, United Arab Emirates
PO Box 502030
Secondary Analyst (ADCB, FGB and ENBD)
Eric Dupont
Senior Director
+33 1 4429 9131
Secondary Analyst (NBAD, UNB and HBME)
Zeinab Abdalla
Analyst
+971 4 424 1210
Committee Chairperson
Gordon Scott
Managing Director
+44 20 3530 1075
Media Relations:
Elaine Bailey, London,
Tel: +44 203 530 1153,
Email: elaine.bailey@fitchratings.com.
Additional information is available at www.fitchratings.com.
Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014, is available at www.fitchratings.com.
© Press Release 2015
